Interest During Construction

Interest during construction (IDC) is the interest payable on debt used to build a project before it begins commercial operation. Because a capital-intensive asset takes years to complete and earns no operating revenue during this period, directly attributable borrowing costs are generally added to the project’s capital cost, subject to applicable accounting and regulatory rules.

How a delay creates additional interest

IDC can be approximated as the sum of each debt draw multiplied by its interest rate and time outstanding. A delay extends the period for which earlier loan instalments remain outstanding before the project generates revenue.

• Interest continues to accrue on debt already drawn even when physical completion is postponed.
• If interest is financed through additional borrowing rather than paid immediately, the interest-bearing debt balance rises and may produce further interest.
• Postponed commissioning also delays operating cash flows that would otherwise service or repay the debt.

Why the increase may accelerate

The effect is not always proportional to the length of delay because it depends on the debt drawdown schedule, interest rate, repayment terms and treatment of accrued interest.

• Inflation, contractor claims and design changes may raise construction expenditure, requiring additional debt and thereby enlarging IDC.
• Variable-rate borrowing can magnify the impact if interest rates rise during the extended construction period.
• A longer delay can therefore create a feedback loop of higher principal, longer exposure and higher interest.

Treatment and project consequences

Under AS 16, borrowing costs directly attributable to a qualifying asset form part of its cost, while capitalisation is suspended during an extended interruption of active development. Contractual interest may nevertheless remain payable even when it is not capitalised for accounting purposes.

• Higher completed cost can weaken project viability and increase the required tariff, user charge or budgetary support.
• In regulated infrastructure, recovery of delay-related IDC may face a prudence check, especially when the delay is attributable to the developer.

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